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Highly respected Certified Foreclosure Specialist, Tara-Nicholle Nelson, a writer for the industry-leading real estate website Trulia.com, wrote an interesting article entitled, 5 Mortgage and Foreclosure Myths, On March 9th for the site.
Can You Qualify for a Home Loan with Bad Credit?
Even though Ms. Nelson is an expert, I respectfully disagree with a couple of her points, ie: (i) Buyers with bad credit can qualify for home loans; and (ii) if you don’t have equity, you can refinance.
Today, we’re going to take a look at why I disagree with her point that buyers with bad credit can qualify for home loans. In a not-too-distant future post, we’ll discuss why I believe it remains difficult to refinance if you don’t have any equity in your home.
Note: I was a mortgage consultant (2005-2006) right before the foreclosure crisis hit. Hence, I saw first-hand a lot of what went on (and what went wrong) that got the housing market in this mess.
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Home Loans with Bad Credit: Why Many Buyers Can’t Qualify Even Though In Theory It’s Possible
Ms. Nelson writes about qualifying for FHA loans with bad credit:
At a FICO score of 620, buyers can qualify for FHA loans at many lenders with only 3.5 percent down. With a score of 580, the lenders are looking for more like 5 to 10 percent down – they want to see you put more of your own skin in the game, and the higher down payment lowers the risk that you’ll default.
While in theory potential homebuyers can qualify for mortgages with scores this low, the actuality of the matter is, it’s going to be darn hard to do so. The reason is, usually, when someone has FICO scores this low, it signifies they have problems handling money.
One of the things that dings a credit score the most is late payments – usually on unnecessary unsecured debt like credit cards. This says to potential lenders that you are a credit risk and they are unlikely to offer you a home loan with this kind of patterned behavior on your credit report.
Another thing is, most lenders want a down payment now, as Ms. Nelson notes. Zero down home loans are basically a thing of the past for the foreseeable future (I personally don’t see them ever coming back to the degree they were before this most recent home foreclosure crisis hit).
But the reality is, many who have credit problems (ie, those with credit scores like 580), don’t have 5% to 10% down payments. According to the June 3, 2009 article on Forbes.com entitled, Down Payment on Home Out of Reach for Half of U.S., Poll Finds, the average home price in America is just under $200,000.
What does this mean for a down payment? As the article states:
With the average home price in America just below $200,000, a 20 percent down-payment is near $40,000, a nice chunk of change by any standard. . . . The NFCC [National Foundation for Credit Counseling] recently asked consumers about their ability to meet the down-payment requirements . . . Of the more than 2,000 respondents, almost half (49 percent) admitted that they’d never be able to save enough money for a down-payment on a home.
Even a low down payment of 3.5% is $7,000. And don’t forget, this is just the down payment. This doesn’t take into account closing costs.
Getting a Home Loan with Bad Credit: Don’t Forget About Closing Costs
Just how much are closing costs?
Well, they run 2 to 4 percent of the purchase price. So on even on the low end at 2%, on a $200,000 home, that’s another $4,000.
So now we’re looking at at least $11,000 and that doesn’t include the incidentals – moving costs, getting furniture and home peripherals, eg, window coverings (which can be expensive as heck). This can run another few thousand dollars easily.
See why I think it’s unlikely that if you have bad credit (eg, a 580 FICO score), you’re unlikely to qualify for a home loan?
That being said, I do think there are those with bad credit who can qualify. Who are they? Well, let’s take a look.
Who Can Get a Home Loan with Bad Credit: The Ideal Candidate
Potential buyers with bad credit – that has not been a part of their overall history – are still good candidates for mortgage loans. The reason is, lenders are taking the recent foreclosure crisis – and the economic factors that contributed to it – into consideration.
So for example, if you had perfect credit for years and years, then lost your job, ran through your savings and fell behind on credit card payments and other bills, then it’s easy to see why “all of a sudden” your credit is bad.
But, if you’re recovering – eg, you found a new job, have caught up your bills and have started saving again – a lender will take these factors into consideration when you go to apply for a mortgage loan.
Note: Learn how to repair your credit quickly and get on the road to home ownership.
A Key Difference Between Potential Homeowners Trying to Get a Home Loan with Bad Credit
But the key difference between this type of potential buyer and the average person with bad credit is that bad credit wasn’t a normal part of their financial history. Circumstances – which everyone these days understand – caused it, and this type of person is reverting to their natural ways (eg, paying bills on time, saving, etc.) now that they are back on their feet, so to speak.
See the difference?
So yes, while in theory it remains possible to get a mortgage loan with bad credit, you have to be a pretty perfect candidate. And if you’re not, the only way to become one is time – start saving, start paying off credit card and other unsecured debt, start living with your means, etc.
All of this signals to a potential lender that even though you’ve may have been irresponsible in the past with your finances, you’ve learned your lesson and are now on the right track.
And, that’s when you’ll qualify for a home loan – even with bad credit.
Home Foreclosure: The New Credit Standards to Qualify for a Mortgage Brought on by the Crisis
Home Foreclosure News: Owning a Home Becoming a Lot Harder for Lots of Americans Because of the Foreclosure Crisis
Foreclosure & Credit: How Does Foreclosure Impact Your Credit Report?
Home Loan Help: Documents Needed to Apply for a Mortgage Modification with HSBC (and Other Lenders)
First-Time Home Buying Advice: Is It Better to Buy a New Home than a Foreclosed Home?
Foreclosure Advice & Credit Card Debt: Can Credit Card Companies Put a Lien On Your Home?
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Copyright © 2011 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.